US Fed moves to unveil strategy to raise rates

Ben S Bernanke, having survived a surprising challenge to his second term as Federal Reserve chairman, now faces the delicate task of beginning to pull the central bank out of its extraordinary effort to prop up the economy.

The main question is when and how the Federal Reserve should start raising short-term interest rates, which have been at a record low for more than a year.

Related is the issue of how to manage, and eventually shrink, the record $2.2 trillion balance sheet that the Fed amassed as it pumped vast sums of money into the economy, starting in 2008. Late on Wednesday (Indian time), the Fed was to release a statement outlining Bernanke’s views on moving away from its exceptionally easy monetary policy.

As a policy tool, Bernanke is expected to consider a little-known mechanism — referred to as the interest rate on excess reserves — that gives the Fed leverage over $1.1 trillion in bank deposits.

Most of those deposits were created as the Fed gobbled up mortgage-backed securities and Treasury notes and bonds during the financial crisis. The banks in turn parked the funds at the Fed as reserves.

The Fed wants banks to not reduce their reserves too quickly, because it could create inflationary pressures.